The Securities and Exchange Commission has charged Bankrate and three of its former executives with accounting fraud.
The North Palm Beach, Fla.-based company, which aggregates financial rate information online, agreed to pay $15 million to settle accounting fraud charges. Three former executives were also charged in the case, which involves fraudulent manipulation of the company’s financial results to meet analyst expectations.
The SEC alleges that Bankrate’s then-CFO Edward DiMaria, then-director of accounting Matthew Gamsey, and then-vice president of finance Hyunjin Lerner engaged in a scheme to fabricate revenues and avoid booking certain expenses to meet analyst estimates for adjusted earnings before interest, taxes, depreciation, and amortization. Bankrate overstated its second quarter 2012 net income. The company’s stock rose when it announced the inflated financial results, and DiMaria allegedly proceeded to sell more than $2 million in company stock.
Lerner agreed to pay more than $180,000 to settle the SEC’s charges. The litigation continues against DiMaria and Gamsey.
“We allege that at the highest levels of its accounting department, Bankrate improperly inflated its financial performance to avoid falling short of Wall Street’s expectations,” said SEC enforcement director Andrew J. Ceresney in a statement. “Bankrate manipulated its financial results through numerous small accounting entries in order to meet analyst estimates on a key metric.”
According to the SEC, after learning that Bankrate’s preliminary financial results for the second quarter of 2012 fell short of analyst estimates, DiMaria arbitrarily decided to increase the company’s revenue after the end of the quarter. Through Lerner, and with Gamsey’s help, DiMaria allegedly directed Bankrate’s insurance and credit card divisions to book round dollar amounts of additional revenue without any support. The insurance division immediately booked the revenue he requested to a dormant customer account, with no intention of justifying the revenue until it was flagged by the company’s auditor, Grant Thornton.
The credit cards division resisted DiMaria’s directive, according to the SEC, but nevertheless booked some improper revenue. Refusing to accept the credit cards division’s unwillingness to record the full amount of improper revenue as he directed, DiMaria insisted that the approximate difference be recorded as revenue by a different business unit. As a result, Bankrate recorded additional unsupported revenue to two arbitrary mortgage business customers.
In addition to booking improper revenue, Bankrate—through the accounting executives—improperly reduced certain expenses or failed to book them at all in order to meet analyst estimates, according to the SEC. One of the expense accounts and related accrual account manipulated by Bankrate had been used as a “cushion” account to manipulate the company’s financial results for at least a year. DiMaria, Gamsey, and Lerner allegedly lied to the company’s auditor regarding the improper accounting entries.
Bankrate and Lerner consented to an order to cease and desist from violating the antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Bankrate agreed to pay a $15 million penalty and Lerner agreed to pay a $150,000 penalty as well as full disgorgement of his ill-gotten gains of $30,045 from selling Bankrate stock after the company announced false financial results. Lerner also agreed to be barred from serving as an officer or director at a public company for five years and from public company accounting for at least five years.
The SEC’s complaint filed against DiMaria and Gamsey alleges they violated or aided and abetted the violation of the antifraud, lying-to-auditors, books-and-records, and reporting provisions of the federal securities laws. The SEC is seeking financial penalties, officer-and-director bars, and prohibitions on working in public company accounting. The SEC is also seeking to recover the profits improperly obtained by DiMaria when he sold his Bankrate stock following the release of the inflated second-quarter 2012 financial results.
